Exercise 7-4 The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part 400,000 units. The estimated current costs are as follows: Operation1 Operation 2 Materials P240,000 Direct labor 180,000 P180,000 Variable overhead 100,000 100,000 Fixed overhead (allocated) 120,000 60,000 Operation 1 can be eliminated if these parts are purchased from an outside vendor. The vendor will supply 400,000 units a year at P2.00 per unit. These parts would still have to be processed through Operation 2. The B Company would have to pay freight charges of P20,000 a year on the purchased parts. If Operation 1 is eliminated, the space can be rented for P25,000 per year. REQUIRED: 1. Should the company purchase the parts or continue making them internally? Use the total approach first. Then use the incremental analysis next.

Exercise 7-4 The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part 400,000 units. The estimated current costs are as follows: Operation1 Operation 2 Materials P240,000 Direct labor 180,000 P180,000 Variable overhead 100,000 100,000 Fixed overhead (allocated) 120,000 60,000 Operation 1 can be eliminated if these parts are purchased from an outside vendor. The vendor will supply 400,000 units a year at P2.00 per unit. These parts would still have to be processed through Operation 2. The B Company would have to pay freight charges of P20,000 a year on the purchased parts. If Operation 1 is eliminated, the space can be rented for P25,000 per year. REQUIRED: 1. Should the company purchase the parts or continue making them internally? Use the total approach first. Then use the incremental analysis next.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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